TOA ROAD (1882) FY2027 Q1 Earnings Report

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Executive Summary

The operating loss narrowed from ¥3.83B in the same period of the previous year to ¥3.33B, but deteriorating profitability in the Construction Business remains a drag on consolidated profitability. Revenue was ¥235.6B (+1.3% YoY), Operating Income was ¥-3.3B (improving from ¥-3.8B in the previous year), Ordinary Income was ¥-2.3B (improving from ¥-3.0B in the previous year), and Net Income was ¥-0.7B (improving from ¥-1.0B in the previous year). The gross margin improved by approximately 89bp YoY to 8.9%, but this effect was offset by an increase in the SG&A ratio to 10.3% (+65bp), and the operating loss continued. The earnings structure is characterized by increased revenue and profits in the Manufacturing, Sales and Environmental Businesses, among others, offsetting the decline in revenue and widening losses in the Construction Business. Changes in the business mix were the primary driver of the earnings improvement.

Factors Affecting Earnings

【Revenue】Revenue was ¥235.6B, representing a 1.3% YoY increase. By segment, the Construction Business declined to ¥121.5B (-7.9% YoY), while the Manufacturing, Sales and Environmental Businesses, among others, grew to ¥115.8B (+13.0%), driving company-wide revenue growth. The business mix is continuing to shift away from reliance on the Construction Business toward the Manufacturing, Sales and Environmental Businesses, among others.

【Profit and Loss】Operating Income was ¥-3.3B, improving from ¥-3.8B in the previous year. The gross margin improved to 8.9% from 8.0% in the previous year, but SG&A expenses increased +8.0% YoY and the SG&A ratio rose to 10.3% from 9.7%, limiting the improvement in the operating margin to -1.4% from -1.6% in the previous year. By segment, the Construction Business loss widened to ¥2.0B from ¥0.85B in the previous year, while profit from the Manufacturing, Sales and Environmental Businesses, among others, increased to ¥5.6B (+52.6% YoY), with profit growth in the latter driving the improvement in company-wide earnings. Ordinary Income improved to ¥-2.3B, supported by non-operating income, primarily dividend income of ¥0.8B, while extraordinary gains and losses were nearly neutral on a net basis (+¥0.02B). Net Income was ¥-0.7B, improving from the previous year despite the impact of income taxes and other taxes (effective tax rate of 67.5%). In summary, while segments with declining revenue and segments with increasing revenue coexist, overall performance is characterized not by increased revenue and lower profits, but by increased revenue and a narrowing loss—in other words, a phase of revenue growth accompanied by improved profitability.

Segment Analysis

The Construction Business recorded revenue of ¥121.5B (-7.9% YoY) and a segment loss of ¥2.0B, which widened from ¥-0.85B in the previous year, resulting in a negative margin of 1.7%. The Manufacturing, Sales and Environmental Businesses, among others, recorded revenue of ¥115.8B (+13.0% YoY) and segment profit of ¥5.6B (+52.6% YoY), achieving a margin of 4.8%. The difference in profit margins between the two businesses has widened to approximately 6.5pt, clarifying the structure in which the Manufacturing, Sales and Environmental Businesses, among others, are the primary driver of consolidated earnings improvement, while the Construction Business is a constraint. Company-wide expenses were ¥6.9B (+4.8% YoY), exceeding aggregate segment profit of ¥3.5B and constituting the primary adjustment factor leading to the consolidated operating loss.

Key Financial Indicators

【Profitability】The operating margin was -1.4% (-1.6% in the previous year), while the gross margin was 8.9% (8.0% in the previous year), indicating a modest improvement in profitability at the cost level. However, the increase in the SG&A ratio to 10.3% from 9.7% in the previous year offset this improvement, and the operating loss continued.【Cash Flow Quality】The difference between the ¥2.3B ordinary loss and the ¥2.3B loss before taxes was minimal, and extraordinary gains and losses were nearly zero on a net basis, indicating that earnings quality is dependent on recurring items.【Investment Efficiency】Annualized ROE was -0.6% and the Equity Ratio was 68.1%, indicating that capital efficiency remained low.【Financial Soundness】Cash and deposits were ¥129.5B. Interest-bearing debt consisted only of the combined ¥0.38B in short-term borrowings and ¥0.13B in long-term borrowings, and the Equity Ratio of 68.1% indicates a high level of financial safety.

Cash Flow Analysis

As this material does not include detailed cash flow statement data, funding trends are analyzed based on changes in the balance sheet. Cash and deposits were ¥129.5B, while short-term borrowings declined by ¥41.1B from ¥44.9B in the previous year to ¥3.8B, indicating progress in improving the financial structure through debt repayment. Although accounts receivable from completed construction contracts declined to ¥178.5B, potentially indicating progress in cash collection, costs on uncompleted construction contracts increased to ¥36.3B (+105.1% from ¥17.7B in the previous year), reflecting greater investment of funds in projects under construction. At the same time, advances received on uncompleted construction contracts also increased to ¥30.6B (+72.0% YoY), with customer advances providing support for working capital. Total assets decreased year on year from ¥774.5B to ¥885.0B, suggesting that efforts to review capital efficiency are progressing alongside a contraction in asset scale.

Earnings Quality

Of ¥1.2B in non-operating income, dividend income accounted for ¥0.8B, or approximately 69%, but represented only 0.5% of revenue, limiting its impact on earnings quality. Extraordinary income of ¥0.2B, primarily gains on sales of fixed assets, and extraordinary losses of ¥0.2B, primarily losses on disposal of fixed assets, nearly offset each other, leaving a net amount of -¥0.02B. Accordingly, the difference between Ordinary Income and profit before taxes was very small. Net Income of ¥-0.7B resulted from income taxes and other taxes of ¥-1.5B against a ¥-2.3B loss before taxes, and was significantly affected by the tax effect, reflected in an effective tax rate of 67.5%. Therefore, it should be noted that the improvement in earnings during the period was partly attributable to changes in the business mix and tax effects, rather than a structural recovery in the profitability of the core business.

Earnings Forecast and Guidance

The full-year company forecasts are revenue of ¥1,300B (+7.1% YoY), Operating Income of ¥60B (+3.7%), and Ordinary Income of ¥61B (+1.7%), with no revisions to the earnings forecast or dividend forecast. The Q1 progress rate for revenue was 18.1%, below the standard 25%, while Operating Income, Ordinary Income, and Net Income were all negative as of Q1. As the company also posted an operating loss in the same period of the previous year, evaluation should take into account the seasonality specific to the construction industry, including construction progress and completion timing. Improving profitability in the Construction Business during the second half will be an important factor in achieving the full-year plan.

Shareholder Returns

The full-year dividend forecast is ¥90.0 per share, resulting in a Payout Ratio of approximately 99.0% against forecast full-year EPS of ¥90.89. This figure is a Payout Ratio calculated using dividends only as the numerator and is not the Total Return Ratio, which includes share repurchases. As of Q1, the company recorded a net loss attributable to owners of the parent of ¥0.8B, creating a structure in which dividend payments are highly dependent on achieving the full-year profit plan of ¥42.0B. Retained earnings of ¥357.2B and cash and deposits of ¥129.5B support the financial capacity to pay dividends; however, with the forecast Payout Ratio near 100%, earnings coverage could decline rapidly if full-year earnings fall below expectations.

Risk Factors

1. Deterioration in Construction Business profitability: Revenue declined -7.9% YoY, while the segment loss widened to ¥2.0B. Increases in construction costs, labor costs, and material prices, as well as progress on low-margin projects, could delay the recovery in consolidated profits.

2. Risk of fluctuations in tax effects and tax burden: Income taxes and other taxes were ¥-1.5B against a ¥2.3B loss before taxes, resulting in an effective tax rate of 67.5%. Quarterly Net Income is susceptible to significant fluctuations depending on the recognition and reversal of tax effects.

3. Risk of changes in the business mix: While the Manufacturing, Sales and Environmental Businesses, among others, with a 4.8% profit margin, are growing, the larger Construction Business is loss-making. Consequently, a delay in the recovery of the Construction Business could continue to suppress the consolidated profit margin.

Industry Benchmark (For Reference; Company Research)

Industry Benchmark (construction)

Profitability and Returns

The company's Operating Margin and Net Margin are both significantly below the industry median, indicating that profitability is at the lower end within the industry.

Growth and Capital Efficiency

The company's revenue growth rate is also below the industry median, indicating relative underperformance within the industry in terms of growth.

※Source: Company research

Key Earnings Highlights

1. The approximately 89bp improvement in the gross margin and the narrowing of the operating loss are positive changes in the results; however, it is important to note that the consolidated operating loss continued due to the increase in the SG&A ratio.

2. The Manufacturing, Sales and Environmental Businesses, among others, achieved increased revenue and profit, with a segment profit margin of 4.8% (approximately +120bp YoY), strengthening their structural role as the driver of consolidated earnings improvement. Meanwhile, the Construction Business continues to experience declining revenue and widening losses, making it the largest variable affecting achievement of the full-year profit plan.

3. Financial indicators—including a current ratio of 211.4%, an Equity Ratio of 68.1%, and interest-bearing debt of ¥5.1B—indicate limited financial constraints. Going forward, the pace of improvement in construction project profitability will be the key factor determining earnings quality.

Theoretical Share Price (Reference Value)

Sensitivity: ¥1,087–¥1,145 at a ±1% change in the cost of equity, and ¥1,114–¥1,115 at a ±0.1 change in ω.

Notes:

• As forecast ROE is below the cost of equity, the theoretical value is below book value per share.
• Net assets as of the end of the quarter are used, resulting in a timing difference from the full-year forecast.
• As net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(Calculation model: Residual Income Model (Ohlson-type, explicit 5-year fade) / Interest rate reference month: 2026-07 / Mechanically calculated value based solely on publicly disclosed data; it is not a forecast of the market share price or a recommendation of any specific investment action, and does not forecast or guarantee future share prices.)

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This report is an earnings analysis document automatically generated by AI based on XBRL earnings release data. It does not recommend investment in any specific security. The industry benchmarks are reference information compiled by the company based on publicly disclosed earnings data. Investment decisions should be made at your own discretion and responsibility, after consulting a professional as necessary.

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